What Has Happened in Other States with High Tax Rates on Million-Dollar Incomes?

Economic prosperity is built from the ground up. The states
that are
most successful in building strong high-wage economies have the best
educated workers, and their prosperity relies on transportation systems
that connect workers to jobs and housing.1
Building and
improving these systems requires revenue for investment.

Several states place high income tax rates on individual
incomes that
exceed an upper threshold. This paper considers the economic experience
of the eight states with the highest top tax rates on high incomes
– rates comparable to the “Fair Share
Amendment” proposed in Massachusetts for incomes over $1
million. These states do not contain fewer taxpayers with
million-dollar incomes by any measure. Nor have these high top-tax
states seen less growth of million-dollar incomes.

While some recent commentary on tax policy in Massachusetts
has focused
on the possibilities that individuals with annual incomes over $1
million might leave the state, the most thorough studies of this issue
have determined that millionaire-tax flight occurs “only at
the margins of statistical and socioeconomic
significance.”2

How Well Have States with High Top-Tax Rates Grown Million-Dollar
Incomes?

Seven states and the District of Columbia have statewide taxes
of
approximately 9 percent or more for their highest income tax bracket:
California leads the pack with a statewide 13.3 rate on income of $1.1
million or more, with an additional gross receipts and payroll expense
tax levied on employers in the Bay Area. New York similarly has an 8.8
percent state income tax on income over $2.1 million that reaches 12.7
percent when New York City local income taxes are included.3
Iowa, Minnesota, New Jersey, Oregon, Vermont, and the District of
Columbia also have state income taxes that reach about 9 percent or
more on the top income bracket.4
This paper uses the familiar
term “millionaire tax” to describe the top-tax
rates in these states. The taxes, of course, are placed on income, not
a household’s accumulated wealth.5

Massachusetts is scheduled to vote on a ballot question that
would fund
investments in education and transportation through a 4 percent tax on
income over $1 million. If approved, the measure would leave the first
million dollars of personal income filed by an individual taxed at the
current 5 percent rate, while bringing the rate, starting with a tax
filer’s “second million” in a single
year, to 9 percent.

Do Millionaire-Tax States Have Fewer Million-Dollar Incomes?

A simple first question is whether states with high taxes on
top
incomes have fewer million-dollar income tax filings compared to other
states. Internal Revenue Service data show that a relatively large
number of million-dollar income tax filings come from these top-tax
states. California and New York have the highest combined tax rates and
the most taxpayers with incomes over $1 million. Their lead in the raw
number of millionaires is largely because of their size: much of the
difference in number of million-dollar tax filings is driven by the
number of people and size of the economy for each state. But together
the eight top-tax states contain 26 percent of all U.S. taxpayers and
contain 36 percent of all taxpayers with incomes of $1 million or more.
The concentration of millionaires in high tax states certainly
doesn’t prove anything about causation – it could
be that states with more very high-income taxpayers are more likely to
tax such people at higher rates – but it does make clear that
states can have higher taxes on millionaires and still have high
concentrations of millionaires.

When comparing the
percent of taxpayers with incomes of $1 million or
more, the pattern is broadly similar: several of the states with higher
taxes on millionaires are among the states with the highest share of
millionaires. Less than one-percent of taxpayers in any state have
annual incomes over $1 million, and the national figure is less than
0.3 percent. Four of the top-tax states rank among the ten states with
percentages of millionaires above the U.S. average. Vermont and Iowa,
on the other hand, are states with top tax rates of 9 percent but a
relatively low share of millionaires.

Do States With Millionaire Taxes
See Less Growth in Millionaires?

If high “millionaire taxes” discourage the
growth
of incomes or drive away large numbers of high incomes from these
states, then we would expect the chart below to show that the number of
high-income tax filings in these states decreased over time or at least
grew more slowly than in other states. Instead, the states with
“millionaire taxes” have seen at least as strong
growth in the number of million-dollar incomes as other
states.6
The two states with the highest millionaire taxes
– California and New York – have seen the greatest
gains in the number of millionaire taxpayers since 2010, the first year
for which the IRS separately reports numbers of incomes exceeding the
million-dollar threshold. The eight millionaire-tax states together,
which contained 36 percent of U.S. taxpayers, saw 37 percent of the
total increase in the number of million-dollar incomes across the
country. Texas and Florida, two states with no income tax and the
nation’s second and third most taxpayers, also saw large
numbers of new millionaires. No-tax Florida had 54 percent of
California’s taxpayer population in 2015, but the number of
million-dollar tax filings grew only 44 percent as much.

States with larger populations tended to experience more
growth in
million-dollar incomes because the vast majority of change in the
number of millionaires results from existing
residents’
incomes rising or falling past the million-dollar threshold –
not because high-income taxpayers are likely relocate to other states.
In California, for instance, Stanford academics Charles Varner and
Cristobal Young found that at least 98.8 percent of change in the
number of millionaires was from income changes by existing residents.7

Because the size of the existing population largely determines
growth
in the number of millionaires, it is worth also comparing states based
on change in the share of very high-income taxpayers over time. As the
chart below shows, four of the top seven states with the biggest
percentage-point increases in the
share of millionaires had high top
income tax rates. On the other hand, the relatively poorer and smaller
states of Vermont and Iowa, which also have similarly high top tax
rates, saw relatively slow growth in their share of millionaires.
Overall, states with wealthier economies during this period tended to
see larger increases in their share of millionaires. Other factors
which make the economy prosperous largely determine the pace of change
in million-dollar incomes in an economy.

The next two charts below compare the increase of millionaire
incomes
relative to the
preexisting number or share of millionaire incomes in a
state. The chart below shows states based on the percent change in the
number of million-dollar income tax filings between 2010 and 2015.
While all states saw an increase in million-dollar tax filings, the
largest percent increase in the number of such filings was in Oregon,
which almost doubled the number of millionaire taxpayers during this
period. Oregon has one of the nation’s highest top-income tax
rates, which was at least 9.9 percent throughout this period. The rise
in the concentration of millionaires in Oregon is particularly striking
because the state shares a border with two states which have no income
tax.8
Oregon’s biggest regional population centers
also add an additional local tax of 0.6 percent on payroll. On the
other side of the growth spectrum below, none of the ten states with
the slowest percent growth in millionaires had high top tax rates.
Three high-income states with high taxes rates – New York,
New Jersey, and Washington, D.C. – perform less well ranked
by this measure than in earlier charts. But overall, the existence of a
high top tax rate does not show a clear connection to the percent
change of millionaire growth.

Similarly, the chart below measures the growth in the share of
millionaires between 2010 and 2015 relative to their share at the start
of the period. This measure accounts for different rates of population
growth and the possibility that it may be more difficult for states
that start with a low percent of very high incomes to add an
incremental share of tax filers beyond the million-dollar income
threshold. For example, Oregon increased in its share of million-dollar
tax filings by 0.09 percent, compared to New York’s increase
of 0.13 percent. But since New York began the period with about four
times greater percentage of millionaires, the relative change to
Oregon’s share of million-dollar tax filers by this measure
is thus more than twice New York’s. Measured this way, the
chart below shows that half of the eight states with top income tax
rates were above the average U.S. growth rate and half were below
average.

These different ways of measuring trends in million-dollar tax
filings
can highlight the relative gains of different sets of states, but no
measure suggests a connection between millionaire taxes and the
presence or growth of million-dollar incomes. The only state that ranks
in the top ten by all measures is California. The top tax rate is
notably higher in California than other states, especially when local
income taxes are considered on top of the state’s 13.3
percent rate.

California’s income growth also does not appear to
be limited
to millionaires. The rate of total income growth, measured by the
IRS’ standard Adjusted Growth of Income measure (AGI), shows
California income grew 42.4 percent during the decade between 2005 and
2015. This growth exceeded the United States rate of 37.8 percent
during this period.9
Meanwhile, no-income-tax Florida saw
total income grow 27.3 percent between 2005 and 2015, well below the
national rate, despite population growth far greater than the national
rate.10
Florida’s per-capita personal income grew
slower than the national average last year, and has grown slower than
California every year since 2010.

Millionaire Migration is a Relatively Minor Factor for State Economies

We know a lot about the characteristics of millionaire income
tax
filers because of a research collaboration between Stanford University
scholars Charles Varner and Cristobal Young and U.S. Treasury
economists which provided access to detailed data on the tax returns of
every million-dollar tax filer in every county of the United States
over a 13-year period. They find that individuals with very high
incomes are less likely than other people to relocate to other states.
This is largely because they share characteristics with other people
who are unlikely to relocate their lives across states: they tend to be
married, to have children, and not be young. They are likely to own a
business and to be embedded in business and social networks.11
Moreover, they find that super elites with even more extreme high
annual incomes over $10 million are no more likely to migrate than
those with million-dollar incomes.12

People with million-dollar incomes migrate less often than other
people. One benefit of having a lot of economic resources is that
individuals can choose where they want to live based on the amenities
and personal factors. Moreover, the success of people with very high
incomes is often dependent on business and social networks which make
them what Professor Young calls “embedded elites.”
People tend to migrate when they are young, and become much less likely
to relocate during the late-career stage when they are most likely to
have high incomes. While people with very high incomes may have ready
access to travel, this is not the same as an inclination to uproot.

The New Jersey Experience

Opponents of high top tax rates for very high incomes in
Massachusetts
often choose to focus on New Jersey and its 8.97 percent tax on incomes
over $500,000 that was enacted in 2004. Total net outmigration of
income from tax filers with incomes over $200,000 was twice as high in
New Jersey as in California. But, as the chart below shows, even the
scary-sounding numbers totaling all net outmigration of income since
2004 are actually very small when compared to the entire state economy
and its growth. In New Jersey, the annual net migration of adjusted
gross income (AGI) is less than 1 percent of total income.

Even the disproportionately small amount of net income
migration
– relative to other changes in the New Jersey economy
– can’t be equated with lost income from high top
tax rates. Firstly, the $3.5 billion figure for New Jersey net income
migration includes migration of all income groups. IRS data does not
report what portion is for tax filers with incomes exceeding $500,000
or $1 million, but they do report the migration of income over
$200,000.13
This is a much larger group of taxpayers, but
includes millionaires. For this larger group, net income migration is
$2.3 billion. Secondly, migration is often motivated by other factors
besides taxes. Only a fraction of relocations are to lower-tax
states.14
And only a portion of those will be motivated by
taxes, as opposed to family, job opportunities, weather, housing, long
commutes, or other factors.15

And thirdly, statistics about the “loss”
of income
from migration overstate the economic impact because the relocation of
high-income residents across state lines doesn’t necessarily
mean that their income fully leaves the state. Much of the income
“lost” actually remains or returns in-state. For
example, if a Massachusetts surgeon retires and relocates to Florida,
other doctors will take the patients and be paid accordingly. Most
people can’t simply take their income stream with them,
unless it is investment income.16

Thus, even in New Jersey, migration of high-income taxpayers
in
response to “millionaire taxes” has been relatively
unimportant. A strong state economy depends chiefly on factors that
support existing residents increasing their incomes, including strong
education and infrastructure.

The author would like to thank the following researchers for their
assistance with data sourcing or interpretation: Michael Mazerov at the
Center on Budget and Policy Priorities, Meg Wiehe at the Institute on
Taxation and Economic Policy, and Mark A. Price at the Keystone
Research Center. Any errors are the responsibility of the author.

3New York City and Yonkers have their own income taxes on
individuals. In New York City, the rate varies from 2.9 percent to 3.6
percent. See The Balance, “U.S. Cities That Levy Income
Taxes” (updated Feb. 2, 2017).

6The fact that all states saw an increase in million-dollar
incomes between 2010 and 2015 is due in part to rising incomes,
especially for those with the highest incomes during this period. It is
also in part due to inflation: a dollar in 2015 had an
inflation-adjusted value of 92 cents in 2010.

8In the counties along the Oregon border with zero-income-tax
Washington State, there are greater concentrations of millionaires on
the high-tax Oregon side. Stark differences in income tax rates between
Oregon and Washington have existed since the 1960s. Cristobal Young,
The Myth of Millionaire Tax Flight: How Place Still Matters for the
Rich (Stanford University Press, 2008), p. 30.

14Among moves between states by tax filers with incomes of $1
million or more, some 32 percent of moves were to states where tax
rates were more than 1 percent higher than the states they moved from;
and 21 percent of moves were to states with tax rates within 1 percent
of difference. For moves not involving Florida, the percentages were 35
percent and 27 percent, respectively. Cristobal Young, The Myth of
Millionaire Tax Flight: How Place Still Matters for the Rich (Stanford
University Press, 2018), pp. 23-26.

15The IRS does not publish data more specifically on migration
of income over $1 million, but mathematically the income from this
group must be a smaller percent than those with incomes over $200,000.
A variety of research has shown that states experience different rates
of population growth for reasons that may have little to do with the
economy, much less taxes. For instance, some states have less available
land and high housing prices that encourage people to locate elsewhere.
Likewise, people tend to migrate toward states with better weather; and
traffic congestion tends to limit population growth for metropolitan
areas. See, for example, Jordan Rapaport, “Moving to Nicer
Weather,” Federal Reserve Bank of Kansas City, Research
Working Papers (2006); “Productivity, Congested Commuting,
and Metro Size,” Federal Reserve Bank of Kansas City,
Research Working Papers (2016).